FASB draws the line between public, private firms

By: Claude Solnik April 11, 2014Comments Off on FASB draws the line between public, private firms

After years of one-size-fits-all accounting regulations designed mostly for public companies, the Financial Accounting Standards Board is finally tailoring regulations to private companies.

In 2012, the FASB – a private nonprofit charged with developing generally accepting accounting principles in the interest of the U.S. public – created a 10-person Private Company Council to develop new rules specifically for private firms. For more than a year, the council crafted proposals that were put out for public comment, while accountants waited to see which, if any, would be officially enforced.

Now, they have their first answers.

Over the past three months, the FASB has approved three proposals designed to lighten the accounting burden on private firms. The new rules are the first creating different processes for public and private firms.

Among other modifications, private firms will see changes in how they calculate the “good will” inherent in certain national brands, how they gather data for audits and how they track certain lease transactions. Basically, private companies will enjoy “streamlined” preparation of their financial statements, according to Steven Wolpow, co-managing partner at Melville accounting firm Nussbaum Yates Berg Klein & Wolpow.

“It will be easier for them to prepare their financial statements,” Wolpow said. “And it will be less costly.”

The 10-member Private Company Council is led by George Beckwith, a past chair of the National Association of State Boards of Accountancy, and may be among the most powerful – if least known – players on the national finance scene.

“They were very quiet until recently,” Wolpow noted. “They finally have taken some real action and issued powerful statements that give private companies new options in how they report and disclose in their financial statements.”

Stephen Mannhaupt, a partner at Jericho-based Grassi & Co., said the new private-company regulations will make finances more manageable for small businesses.

“This really benefits that family-owned business, that local company that’s doing a significant amount of work but isn’t handling billions of dollars of revenue,” Mannhaupt said. “These family-owned businesses don’t have sophisticated accounting staff.”

Many accountants believe it never made sense for goliaths like GE and the mom-and-pop on the corner to abide by the same accounting rules.

“The accounting standards that were promulgated by FASB were driven by the Fortune 500 companies,” Wolpow noted. “You could have a company doing $1 million in sales with the same levels of disclosure and complexities in their financial statements as a multibillion-dollar company.”

Another disconnect: Public companies answer to investors, hedge funds and private equity groups, while private firms’ financial statements are largely used by owners, buyers and lenders, who typically have other avenues to request additional financial data if necessary.

In one of the latest rule changes, the FASB in March approved simpler, less burdensome protocols for private companies leasing real estate from their owner. Rather than having to consolidate the operating company and leasing company, firms can now report on them separately, saving time and money.

In January, the Private Company Council simplified the way private companies account for borrowing at floating rates and issued new rules for measuring and accounting for good will.

FASB Chairman Russell Golden said moves like this will still provide useful information, while “reducing costs and complexity” for private companies.

They could also mean less work for accountants, Wolpow said this doesn’t necessarily mean accountants will suffer.

“It will streamline the accountants’ obligations, cut down on the time necessary and prove less costly for them as well,” he said.

While the FASB simplifies processes for private companies, the reverse is happening with public firms, which are struggling beneath regulatory burdens.

“Accounting for public companies continues to get more and more complex and difficult,” Wolpow said.

Expect that accounting divide to widen – the FASB is planning even more simplifying regulations for private companies. Among them: a proposal that changes the way private firms account for intangible assets like trademarks and patents.

There’s “potential for not issuing this fourth item,” Mannhaupt noted, citing industry sentiment that reporting regulations exist for a reason and the Private Company Council might be going too far. If it does pass, Wolpow said, it will be because the FASB did its homework.

“The Private Company Council has done a lot of research,” Wolpow said. “There’s a lot of vetting that goes on before these are approved.”